The Four Tough Questions to Ask Yourself in a Tough Market

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

For investors who are used to living large, this has been the year from hell.

The markets are tanking. Food costs 25% more than it did a year ago. Inflation is on the march for the first time in decades. The sky's the limit on gasoline after oil prices have doubled in the year.

No doubt about it: As far as financial downturns go, this mess is the real deal.

With that in mind, we've taken the time to provide you with candid answers to four questions we've been asked time and again. And that's not all. We used those questions to craft a three-step strategy that will give you the returns you seek, without forcing you to "bet the ranch."

Q: How Bad Are Things Right Now?

A: Let's not mince words, here - they're bad. Our take is that this is the worst financial crisis since the Great Depression. Folks should not be the least bit surprised by last week's horrendous drop-off, nor should they be surprised to learn that the Dow Jones Industrial Average has endured its worst June since 1930.

The sad thing is that it didn't have to be this way.

For nearly 20 years, the U.S. Federal Reserve under former Chairman Alan Greenspan flooded the markets with cheap money and easy credit that encouraged individuals and institutions alike to take hugely imprudent risks with their money. The Fed should have opted to "stand pat" and allowed the greenback to strengthen; instead, it created all that cheap money and allowed the dollar to sink to Third World debtor status.

Unfortunately, it doesn't look like current Fed Chairman Ben S. Bernanke is going to "get with the program" and see the light anytime soon.

Q: How Bad Could It Get?

A: Our proprietary technical analysis suggests that we could actually see the Standard & Poor's 500 Index trading at half of its 2007 peak of 1,576.09, which would send the broad index all the way down to a sickening 788.04 before this is all done.

While this is possible, we're not saying that it's necessarily probable. That's actually an entirely different question and could well be determined by one key issue: How quickly and how thoroughly the banks and financial institutions "de-leverage."

If banks "came clean" all at once, the markets would probably take a quick hit. As history shows us - quite clearly - the financial markets can digest bad news remarkably well, and tend to spring back very quickly.

Unfortunately, by intervening so aggressively and so frequently, the central bank has kept the markets from functioning effectively. Indeed, all the Bernanke-led Fed has done is to postpone the inevitable.

Team Bernanke also is sending the wrong message - telling financiers that it's somehow OK to keep hiding as much bad debt as possible for as long as possible because Uncle Sam will come riding to the rescue.

This is a complete perversion of the Federal Reserve Act, which was created "to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

And, as investment guru Jim Rogers pointed out when I interviewed him at his home in Singapore earlier this year: "Nowhere does [the Act] say that the Fed is supposed to bail out investment banks. It's absurd."

Unfortunately, no matter how absurd this seems, the bottom line is that it's really happening - and that means we must face the problem head on and deal with it. To deal with it effectively, however, you have to know precisely what you're dealing with. So, let's take a look at some key questions you should be asking.

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Q: How Will It Affect Me?

A: There's obviously going to be a financial effect. Not only are the markets likely to remain unsettled until the de-leveraging is complete, but the Fed's reckless liquidity-pumping scheme will result in serious inflationary pressure well beyond what we're already feeling.

As disheartening as that is to accept, the real challenge we'll face as investors will come from the person we gaze upon in the mirror each morning.

The reason is that we tend to default to our most basic and counter-productive instincts when the markets get rocky. We allow irrational fears to take hold. Then we let those fears take over. The result: We begin making bad decisions that all too often induce us to join the rest of the investment lemmings and run right off the cliff.

Next time you find yourself in such a predicament, take a moment to step aside, take a deep breath and really evaluate your situation. You have many more options than you might initially believe.

Q: Is There Any Good News?

A: Absolutely. As history teaches us, the lowest returns come to those who buy near, or at, market peaks - like those of 1928, 1969, 1999 and 2007.

Profits are usually a byproduct of courage - or, at the very least, a belief in proven strategies. That's why the biggest investment returns come to those who invest when the days are darkest: Think 1932, 1942, 1982 and 2003 - when the world looks like it's going to hell in a hand basket. (Even so, that doesn't make the conversations we have with our spouses - such as this recent exchange with my wife - any easier: "Honey, you remember that stock we lost $20,000 in? Well, we just bought more ...").

I may be the trader in the family, but she knows the statistics, too. Even so, understanding that it pays to "buy when there's blood in the streets" doesn't make the move any easier. I'm sure you can relate on this point.

Q: Are there any steps I can take right now to protect my assets, and even profit in today's markets?

Again, the answer is: Absolutely. Using history as our guide, the real question is not will the markets recover, but what's necessary for them to do so? And what can I do to protect my upside potential?

To make the process a bit simpler, I've detailed three rules to follow:

  • "Sure things" beat "next-best things" - virtually every time: Having a properly balanced portfolio is the first, and most important, step to surviving and prospering in uncertain markets. Believe it or not, many investors are still "putting the pedal to the metal," even though this is hardly the time to do so.

We urge a proprietary 50-40-10 portfolio split (50% in "Safety & Balance," 40% in "Global Growth & Income," and 10% in speculative investments that we've playfully labeled as the "Rocket Riders" to underscore our point). Quantitatively, this risk-reduction mix helps us avoid the losses of the broad market during bearish periods, and achieve as much as 91% of the stock market's total returns during rallies - while using less than half the market risk to accomplish all this.

  • Profit from inflation: When the markets get tough, inflation can really eat into your returns. To counteract this, a good chunk of assets should be focused squarely on commodities, energy and other stocks that actually can dually benefit from inflation and raise prices for the goods and services they sell as a means of additional protection. For added security and upside, split ‘em using the 50-40-10 structure above.
  • Go where the growth is: Within the next five to 10 years, global investments are projected to double to nearly $300 trillion, with 60% of that growth coming from established markets such as the United States and Japan. That means that tomorrow's market leaders will probably be selling products we've not yet seen, featuring names that we can't pronounce.

Right now the best values can be found in global blue chips, offering the unbeatable combination of high cash flows and strong pricing power. Not only have these shares been beaten down to the cheapest levels we've seen in years, but they have plenty of cash on hand.

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About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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